TMFDeej (99.21)

Sin Pays...now that's my kind of back-testing

20

Everyone has seen the funds and investment strategies that are focused on "sin" stocks, like tobacco, alcohol, gambling, etc, however I've never seen statistical evidence that these stocks outperform the overall market...until now.

A professor from the NYU Stern School of Business recently published a paper called "The Price of Sin: The Effects of Social Norms on Markets." The study found that an investment in sin stocks outperforms an investment in comparable non-sin stocks (beverage, food, and entertainment companies) by 2.5% per year.

Also of note, the study found that the societal norm against funding "sinful" operations prevents many funds and institutional investors, such as pension plans from holding any or at least as much stock in these companies. Furthermore, "sin" stocks receive less analyst coverage than comparable stocks from less controversial industries.

I almost forgot to mention that the authors of this study back-tested this trend all the back to 1926. Now that's my kind of back-testing. It certainly beats the 10-year period that the Magic Formula has been tested that I took exception with last week.

Sin is an economic moat in itself, so unless you are looking to invest in a company that delivers a particular sin in a uniquely profitable way, scale matters.

Long DEO

Before acting on this study, bear in mind the stocks that would have contributed to the outperforming returns were experiencing a golden age of growth and face a present environment for their products that is less accepting and quite different from the past. For example, I could run a back test from 1911 on blue chip American auto companies (only Ford remains) and compare it to Toyota or Honda; maybe Ford would outperform, but the conclusion is useless when considered in isolation of the present day reality.